With around 20 million borrower accounts estimated for March 2012, India still has one of the largest microfinance industries in the world – even though the number is much lower than 32 million in October 2010 when the microfinance crisis began. However, in March 2012 it also had the dubious distinction of having perhaps the worst portfolio quality in the world (at the national level). Since October 2010 commercial bank lending to MFIs, which made up over 70% of their funding, has been consistently drying up mainly because of perceived political risk. Read the rest of this page »
This time last year, I was travelling across India on a “Shodh Yatra,” an inquiry into the lives and livelihoods of the poor. Prompted by events in Andhra Pradesh, my 5,000 Km journey by foot, by car, by rail and occasionally by air, across 12 Indian states allowed me to reflect on 30 years of working in development.
Stepping back from events in India, CGAP asked me to reflect on the last year for financial inclusion globally. And from that vantage point, I want to highlight significant progress, or at least some encouraging signs that reaffirm the importance of the collective effort to advance financial services for the poor, in which CGAP plays an important role as a global public good. Read the rest of this page »
I run a microfinance institution (MFI). It was born of the strong conviction that market forces can help solve social issues.
Having worked earlier in the formal financial sector, I am acutely aware that the market is a double-edged sword: the benefits of price discovery, innovation, and customer centricity can sometimes be undone by an excessive focus on profit. Recognizing this, our approach was to design our MFI—Janalakshmi—in a two-tier structure: a non-profit company Read the rest of this page »
Indian microfinance institutions (MFIs) have been criticized in some quarters for their high interest rates, indebteding clients, and coercive recovery practices. The recent study by the National Council for Applied Economic Research (NCAER), sponsored by the Microfinance Network (MFIN), brings much-needed data into the discussion. Covering over ten thousand households across multiple Indian regions, this study merits attention.
How do some of its assertions hold up?
The study reaffirms that the banking system has low penetration of credit and that MFIs and SHGs fill an important gap.
Informal lending still constitutes almost half of all loans. However, in regions where either MFI or SHG (or both) types of lending are deeper the level of informal borrowings is lower. The study also confirms the widely accepted notion that the sources of lending vary widely by region. Read the rest of this page »
Much – too much – is hoped for from the Indian Microfinance Bill. But this is nothing new in the global annals of microfinance. For more than a decade stakeholders across the spectrum in countries around the world have pinned hopes on ‘just the right microfinance regulation’ solving problems only indirectly affected by regulatory policy. In India, no kind of regulation will miraculously rebuild the repayment culture among the poor of Andhra Pradesh or mitigate over-indebtedness there. It is not even clear whether the current legislative proposal could conclusively settle the jurisdictional battle between the central government and the AP state government that has fueled the crisis, or prevent other state governments from testing the limits of their authority to regulate financial sector matters when it suits their particular political purposes. Read the rest of this page »
In this short video Vijay Mahajan, Chair of Basix, welcomes a new customer to Sub-K, Basix’ new agent banking service in Panchlingala, a small village on the outskirts of Kurnool in Andhra Pradesh. The customer has brought two forms of photo ID with him to open the account, and he speaks his voice password into the agent’s mobile phone in Kannada, one of five languages in which the service works.
It’s “truly a high-tech solution,” Mahajan told me, brought to outlets like this small store where people go daily to buy small goods.
Sub K in Hindi means for everybody –and the tagline of the service is bringing prosperity to everyone. It’s meant to attract customers sending or depositing less than 1,000 Rupees, or about $20 at a time. Vijay sees it as a way to move beyond microcredit in India to offer safe financial services to poor people on their doorsteps: “Microfinance in the old style way anyway didn’t have any savings in India,” he says. “So it’s really adding microsavings, remittances, and government payments—three important services to microcredit–and therefore making the whole model viable.”
The new service, like other mobile and agent banking services, including the successful Kenyan mobile money transfer service M-PESA , is intended to enable people to carry out microtransactions safely and conveniently.
With this, says Vijay, “We think we will make the next new breakthrough in the availability of financial services to the poor.”
The draft Indian Microfinance Institutions (Development and Regulation) Bill 2011 has been made available by the Central Government for comments. The bill has been under preparation for a long time and in its last avatar left out the for-profit Microfinance Institutions (MFIs) outside its ambit completely. However, in its new avatar, the bill appears to be a comprehensive piece of legislation that wants to resolve the long standing challenges that the microfinance sector has faced.
The change in the thinking of the government in terms of introducing the comprehensive microfinance bill to replace the old one and emphasizing the supremacy of the regulator, the Reserve Bank of India (RBI) is a consequence of the events in Andhra Pradesh where the State Government has introduced a State level Act to regulate MFIs. It thus is best if we look at the Bill from that perspective and comment on its ability to answer the key challenges it had identified to resolve. Read the rest of this page »
The Government of India promised a new draft microfinance legislation, and it has delivered. The consultative process adopted, the work done by the Malegam Committee, and the regulations issued by the Reserve Bank of India (RBI) and the participation of the lenders, practitioners and others have made the draft comprehensive and well-rounded. The Andhra Pradesh statute, despite its debilitating impact on the sector, seems to have triggered this comprehensive response from the Union government. The need to regulate the microfinance sector in customers’ interest and also the need to avoid a multitude of microfinance legislation in different states has led to this bill which keeps registered microfinance institutions (MFIs) out of the ambit of money lending laws.
The chief features of the bill are that every institution in microfinance should register with the regulator, transform into a company when they attain a significant size, be subject to a variety of prudential and operational guidelines that are introduced by the regulator, provide periodic information to the regulator and face penal action for violation of law or any rules framed. The bill provides flexibility of RBI to apply different measures, vary the same and delegate the powers to regulate to NABARD.
The grievance redressal procedures, mandatory enrollment to credit bureaus and code of conduct enforcement through industry associations will improve customer protection. The creation of national and state councils should provide wider sector participation in policy making. The proposed microfinance fund that would not only provide grants but also bulk finance to MFIs is a very welcome proposition. Read the rest of this page »
India’s microfinance bill is a very positive development for the microfinance sector because it brings the sector into the ambit of organized financial services. It continues the process initiated by the Malegam Committee Report earlier this year and then followed by the first set of Reserve Bank of India (RBI) regulations on May 3, 2011. Previously, MFIs were loosely regulated and operated in the twilight zone, vulnerable to ordinances or legislations like those in Andhra Pradesh last year which suffocated the entire sector in the state. Read the rest of this page »
“Although [microfinance] has promise on a small scale, history suggests that when scaled up, and especially when used as an instrument of government policy, it will likely create significant problems…”
So wrote distinguished economist Raguram Rajan in Fault Lines: How Hidden Fractures Still Threaten the World Economy –perhaps influenced most by his familiarity with Indian style microcredit.
A year ago I might have glazed over Professor Rajan’s comments. But I have followed closely the events that have unfolded among MFIs in Andhra Pradesh in India and with Professor Yunus at the Grameen Bank in Bangladesh over the past year. And I’ve had many conversations with those with insight into microfinance and the broader political economy in both India and Bangladesh.
Until recently, microfinance in India (really microcredit) had been driven by innovators and entrepreneurs, but also enabled by government policies such as of priority sector lending and regulatory restrictions prohibiting deposit mobilization for most MFIs. These policy prescriptions eased the flow of credit while cutting off options to innovate around deposit services. And a rapid expansion of credit-only MFIs occurred in a country that is a vibrant and hotly contested democracy. Competing parties and candidates fight tooth and nail for votes promising lower staple food prices, unemployment benefits, electricity, and other basic needs. Read the rest of this page »
With around 20 million borrower accounts estimated for March 2012, India still has one of the largest microfinance industries in the world – even though the number is much lower than 32 million in October 2010 when the microfinance crisis began. However, in March 2012 it also had the dubious distinction of having perhaps the worst portfolio quality in the world (at the national level). Since October 2010 commercial bank lending to MFIs, which made up over 70% of their funding, has been consistently drying up mainly because of perceived political risk. Read the rest of this page »
